Monday, December 15, 2008

state budget woes and long-term planning/leadership

States have far less discretion than the federal government in terms of budget discipline. The feds can borrow money much easier, and of course, they control the printing press. Still, states struggle, especially in down times-- given their propensity to spend what they have on-hand in the good times.

Here's Steven Malanga in the WSJ
, admonishing state leaders to be more effective...

Last year at this time, many governors and state legislators were imploring Congress to let them spend more money by expanding the State Children's Health Insurance Program....Today, governors and state legislators are singing a different tune. Unable to pay their bills as tax revenues shrink, they're imploring Washington to bail them out....

This zigzagging -- beseeching the feds to let them spend more money one year, begging for a bailout the next -- is what passes for long-term budgeting in many state capitals. From the end of the last recession in 2003 until this year, states collectively boosted general-fund budgets by an annual average of some 6.4%. In just 2006 and 2007 alone they added about $100 billion. During the period from 2003-2008, states also took on 38% more debt, increasing their collective indebtedness to $2.19 trillion.

Now it's cold-shower time. Earlier this year, in the spring, more than half of the states grappled with budget deficits amounting collectively to nearly $50 billion. Since then tax collections have fallen short of projections, producing further midyear budget holes in nearly two dozen states....

This is not the first time states have been caught in this trap. One reason is because many fail to address their deep, structural budget problems during the good times, preferring to use booming tax revenues to start or expand politically popular (and often costly) programs. Another, deadlier issue is their failure to deal with huge and growing employee pension and benefits liabilities.

For years, state and local politicians have bought support from public sector unions by promising big benefits. Over time these promises exert severe pressure on their budgets. A study three years ago by the Employee Benefit Research Institute estimated that the average public sector worker earns 46% more in total compensation than his counterpart in the private sector, largely because government employers spend 60% more per worker on benefits than counterparts in the private sector. States have collectively racked up some $731 billion in unfunded liabilities for pensions and other retirement benefits.

...many state officials want the federal government to boost infrastructure aid as part of a federal spending package, so that states can build more roads, bridges and mass transit. This is typically unimaginative: Around the world sits hundreds of billions of dollars of private capital looking to go to work financing infrastructure, which our states are largely ignoring.

Countries as different as France, Spain, China and Russia have tapped this money. In the U.S., only a few governments have even tried. Indiana Gov. Mitch Daniels privatized the state's major toll road for an upfront payment of $3.8 billion in 2006. He put the money in the state's transportation trust fund and increased investments in infrastructure. Other governors, like Mr. Rendell in Pennsylvania, have tried similar maneuvers. But they've been blocked by state legislators who want to keep these assets -- and the public-sector jobs that usually are dedicated to running them -- in government hands....


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